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Financial Studies - Unit Two > Topic 2 > Flashcards

Topic 2 Flashcards

1
Q

Why do people save in the longer term?

A

To finance a future medium term or long term need, want or aspiration

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2
Q

What is the purpose of saving for a longer time?

A

These future needs, wants or aspirations require a significant amount of money, so people must save for a longer period of time

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3
Q

How are two ways a matured savings or investment fund be used?

A

They can hope for capital growth
They can use the fund for income

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4
Q

What is a portfolio?

A

The combination of savings and investments chosen by one investor

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5
Q

Why may someone have a portfolio?

A

When saving for something large or their retirement

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6
Q

What are some providers of long term savings and investment products?

A

Banks
Building Societies
Ns&I
Post Office
Insurance Companies
Investment companies

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7
Q

What are the main categories of investment products?

A

Property
Stocks and Shares
Stocks and Shares ISA
Corporate and government bonds

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8
Q

Features of Stocks and Shares

A

Shares can be bought either from the company directly, or on the stock market from a previous owner

(Someone who buys shares will pay the market price at the time) The price will change subsequently and may rise and fall

It’s always almost possible to sell shares if you need cash back, but you have to take the risk that the share values have fallen

Shareholders also hope to receive a dividend, which are paid on a regular basis, usually half yearly or yearly

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9
Q

What is a dividend?

A

A share of the annual profits made by the company

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10
Q

A feature of Stock and Shares ISAs

A

Allows a person to put money into different types of investments on a tax efficient basis

Free of UK income tax and capital gains tax

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11
Q

What is the time period people are advised to use a Stocks and Shares ISA? And why?

A

5 years
The value of the ISA will fluctuate with changes in market values & the investor needs time to take advantage of periods when values rise

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12
Q

What are the two options an investor can do?

A

Buy a readymade product and let the provider manage the investment for them
Or
Choose and buy their own shares and put them into an ‘ISA wrapper’

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13
Q

What is an ISA wrapper?

A

You can “earmark” shares up to the permitted limit for ISAs (the allowance) and receive a tax free return on these shares (regardless of any other investments you may have)

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14
Q

The meaning of Corporate and government bonds

A

Companies, governments and other bodies that need to borrow money issue bonds

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15
Q

Features of Corporate and government bonds

A

Investors lend their money to the issuer by purchasing the bonds, but as they’re lending money to the company this makes them CREDITORS not part owners

Bonds issued by the government and companies are traded on a financial market and their values fluctuate

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16
Q

What happens when a bond matures? And what can you do before a bond matures?

A

The issuing company or other body, repays the capital value of the bond

There is a market in bonds, where holders can sell their bonds before maturity if they want their money back

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17
Q

How do bondholders receive income?

A

They receive income in the form of interest on their bond, which is usually at fixed rate and usually twice a year

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18
Q

What are the one of the best known bonds?

A

“Gilt edged bonds” or “Gilts”
They are issued by the government and are regarded as safe because it’s unlikely the government will be unable to repay its capital or to keep up the interest payments

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19
Q

What is property?

A

It refers to mainly land and buildings, residential property (houses and flats) or commercial property (office block)

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20
Q

Features of Properties

A

Both individuals and companies can include property in their investment portfolios

Property is seen as a good investment proposition as property prices tend to move upwards in the long term (it can still be risky in a possible economic downturn)

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21
Q

What can you do with your property in retirement? And how can this benefit you?

A

You can sell your property and downsize to a smaller property, and invest the cash difference to give yourself an income

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22
Q

What is a “buy to let” mortgage?

A

With a ‘buy to let’ mortgage, people can buy more properties which they can rent out to give themselves an income

They hope this income will cover the mortgage repayments, so they can benefit from any increase in the value of properties

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23
Q

Why can “buy to let” be risky?

A

• Due to the current economic circumstances
• As well as the fact that “buy to let’ mortgages have been more difficult to access since the financial crisis

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24
Q

What are some investment funds offered by the FSPs?

A

Barclays funds
Lloyds Bank sharedealing

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25
Q

What are collective investments?

A

They are specialist organisations that carry out investments on behalf of their clients

26
Q

Why are collective investments sometimes called “pooled investments”?

A

The money contributed by many people is put into a common pool and investments are made out of that money

27
Q

What are some advantages of collective investments?

A

Risk is reduced because the fund invests in a large number of different types of company

The investor can take advantage of the expertise of the investment manager

The cost of hiring the services (of a skilled fund manager) is shared among all the investors

There is a wide choice of investment funds and collective which cater for all types of investors, preferences and risk profiles

28
Q

What is a Unit trust?

A

The most common form of collective investments in the UK

They appeal to investors who want to buy shares but are too small or inexperienced to be able to invest on their own

29
Q

What is the role of the managers (the promoters) in a unit trust?

A

Investing the funds
Valuing the assets
Fixing the prices of units
Offering the units for sale
Buying units back from unit holders

30
Q

What are trustees responsible for?

A

• Ensuring that the managers comply with the terms of the trust deed
• They hold and control the trust assets on behalf of unit holders
• They collect income from these assets
• They distribute income to unit holders

31
Q

Unit trusts are open ended, what does this mean?

A

That more units can be created when more money is invested

32
Q

Are unit trusts allowed to borrow?

A

No

33
Q

Unit trusts are unitised funds, what does this mean?

A

Each unit represents a proportion of the funds total asset value

34
Q

What are investment trusts?

A

The issue shares which are purchased by investors and traded on the stock market

35
Q

What do investment trusts do with the money they receive from the share issues?

A

It’s used to trade in the stocks and shares of other companies and in certain other investments

36
Q

Unlike unit trusts, investment trusts are closed ended, why is this?

A

The number of shares they issue is limited by the investment trust’s constitution and cannot easily be increased

37
Q

Are Investments trusts allowed to borrow money?

A

Yes

38
Q

How do you invest in an investment trust?

A

A person must buy its shares and then to cash in, the person must sell the shares

39
Q

What are the two levels of risk the investor takes?

A

1) The shares, in which the investment trust company had invested IN, might fall in value
2) The shares of the investment trust company ITSELF might fall in value

40
Q

What are OEICS?

A

Open ended investment company funds

A pooled collective investment vehicle, and they’re a cross between unit trusts and investment trusts

They gave a corporate structure & issue shares, but the number of shares can vary and can be created or liquidated according to the number of buyers and sellers

41
Q

How are OEICS managed?

A

They’re managed by an authorised corporate director, whose role is similar to a manager of a unit trust

42
Q

What is the depositary responsible for?

A

Overseeing the operation of the company and making sure that it complies with the requirements for investor protection (similar to a trustee of a unit trust)

43
Q

What is Term Assurance?

A

An insurance plan that runs for a fixed period of time and pays out a lump sum if the insured person dies during the term

44
Q

What is an Endowment Policy?

A

A life insurance contract that pays a lump sum after a specified term or if the insured person dies before this date

45
Q

What are endowment policies often used for?

A

Provide a lump sum to pay off a mortgage or another long term debt
They can also fund a specific event in the future

46
Q

Can endowment policies be surrendered?

A

Yes, they can be surrendered before maturity but the insured person is likely to loose a lot of money

47
Q

What in an annuity?

A

A product that provides an income for people when they retire

48
Q

How does an annuity work?

A

A person takes the lump sum which they already had saved and uses it to buy an annuity
This provides them with a guaranteed income for a fixed number of years until the holder dies

49
Q

What are final salary schemes?

A

It pays an employee a pension based on the number of years they have worked for an employer
And it’s linked to the amount of their salary of the time they retire

50
Q

How does the final salary scheme work?

A

It requires the employee to make regular contributions from their salary and the employer also has to make payments to ensure the agreed benefits can be paid st retirement (known as “defined benefit” schemes)

51
Q

What are money purchase schemes?

A

Where the employee pays into the pension plan over their working life

52
Q

What to do when retired?

A

The employee takes the amount they received (which depends on how the scheme was performed) and uses it to purchase an annuity to provide income

53
Q

What are personal pension plans?

A

Long term money purchased products providers by banks, insurance companies and other providers to help customers build up a pot of money they can use to buy an income

54
Q

What is an auto enrolment?

A

Most workers must be automatically enrolled by the employer into a workplace pension scheme, then they have the choice to leave if they wish

55
Q

Why was auto enrolment introduced?

A

The government believes people are not saving enough for their retirement so they introduced this obligation in the Pensions Act 2008

56
Q

What is the National Employment Savings Trust (NEST) ?

A

A large, trustbased, defined contribution, multi employer pension scheme which aims to ensure that the majority of workers are enrolled in an occupational pension

57
Q

What is the State pension?

A

A regular payment made by the government to people when they reach state pension age
As long as they have paid or been credited with sufficient National Insurance contribution

58
Q

What is the state pension age?

A

66 for both women and men, but this continues to increase as life expectancy increases

59
Q

What is a dividend?

A

A share of profits paid by a company to its ordinary shareholders

60
Q

What is capital gains tax?

A

A tax on any profit made when someone disposes of an asset
(the tax is levied on the gain and not the amount of money received for the asset)

Financial Studies - Unit Two (9 decks)

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